HOW TO SEPARATE INCREMENTAL GROWTH FROM INNOVATIVE PRACTICES
By Art Markman, Ph.D.
It has become common — almost obligatory — for business leaders to talk about the importance of innovation. The assumption is that companies can succeed in the short-term through incremental growth of the core business, but long-term success requires developing new streams of revenue and disrupting the industry.
Despite these talking points, few companies engage regularly in innovative practices, focusing instead on incremental growth.
Creating an innovative organization requires developing a culture that supports and values innovation. As important as it is for a CEO to talk about innovation, it is far more important to align that rhetoric with the actions of upper management, as well as the company’s reward structure.
In short, there is what you say, what you do and what you reward. Your employees respond to those three elements in reverse order.
Are You Rewarding Innovation?
Employees are focused on rewards and punishments in the workplace. People want to succeed, they want to see their careers advance and they want recognition for good work. They also want opportunities to engage in big and important projects, and chances to get involved in work with senior leaders of the company as well as key customers and stakeholders. All of those opportunities can be used as potential rewards for a job well done.
Many CEOs would like to see a portfolio of potential extensions of the current business, 10 percent of which is made up of projects that attempt to disrupt a key market. However, most division managers’ bonuses and evaluations are driven by the revenues their units generate. In addition, promotions often go to people who have grown their units successfully — another kind of incremental growth. These reward structures bias middle management against pursuing innovative projects.
Disruptive innovations often fail, and even when they succeed, they often take a long time to yield significant revenue growth. As a result, it is rarely in the best interests of any individual manager to support a disruptive project, because there is a high probability that it will be a drag on the unit’s revenues in the near term.
Companies seeking to promote innovation must examine their reward structures in detail. Accounting procedures and bonus practices that allocate rewards based primarily on revenues need to be adjusted to promote a moderate degree of risk taking. For example, a bonus pool can be set up that includes a percentage of revenues from potentially disruptive projects across the organization. Managers can become eligible for this pool by supporting an innovative project and agreeing to allocate a percentage of revenues from that project to the bonus pool. This way, the risks of supporting significant innovations are spread across the company, while managers benefit from the company-wide successes of those projects.
In addition, because many early- and mid-career managers may be concerned about the stigma of failure, it is important for companies to celebrate the best failures each year. That is, when a group works hard to develop a new idea and engages in all of the right practices, that group should be feted, even if the project fails to bring in the expected revenues. The team has learned a lot that will be valuable the next time they swing for the fences.
What Are You Doing?
Employees are also looking at what people around them are doing to get a feel for the actions they should be taking. Indeed, goals are contagious: when we see somebody engaging in an activity, we experience an unconscious drive to engage in the same activity.
Often, though, we focus on trying to make our employees as productive as possible. In open offices, we want to see people at their desks hard at work. We assume that the most effective workforce is one that is maximizing its focus on the task at hand.
Unfortunately, innovation is often at odds with productivity in two ways:
First, in order to develop creative ideas, it is crucial for people to spend time each week expanding their base of knowledge. Those activities do not result in billable hours today, but they till the soil for future creative ideas.
That means it is important to provide visible opportunities for employees at all levels to improve their knowledge. Corporate training is one step in this direction, but often companies focus on courses that seem directly relevant to an employee’s productivity. It is important to give people the chance to expand their knowledge and skill in areas that may be useful in the future, even if they are not clearly applicable in the moment. After all, the inspiration for an innovative project is only clear in retrospect.
In addition, innovation requires a cross-fertilization of ideas from across the organization. That means people should be encouraged to break out of their silos and have conversations with people from other groups. Management can encourage these collaborations by sponsoring lunches and group meetings in which people from different business units have the chance to talk and share knowledge.
Second, unlike many tasks in the workplace, innovation does not have a clear timeline. For tasks related to incremental growth, project management tools and group meetings that track progress often focus on schedules for ongoing work.
Innovation, however, does not march steadily toward a goal. There are often unexpected technical hurdles that arise as new ideas are developed. Solving problems with new projects may require inspiration that comes at unexpected times. When most people are engaged in projects that have straightforward timelines, the chaos of innovation can make employees feel uncomfortable.
It is important to give people working on innovative projects the permission to push forward steadily, even when it is hard to identify or document clear progress. Unfortunately, it is often difficult to know whether innovative projects are moving toward successful outcomes until all of the pieces fall into place. Thus, the mindset for innovation differs significantly from the traditional mindset of productivity.
So, Are You Serious About Innovation?
To be truly serious about innovation, then, it is important to explore what people are doing, and the kinds of activities the company rewards. Generally, organizations succeed at becoming more innovative when their reward structures encourage people to engage in innovative practices, and when there is visible activity relating to innovation around the company.
Art Markman, Ph.D., is the Annabel Irion Worsham Centennial Professor of Psychology and Marketing at the University of Texas at Austin, and Founding Director of the Program in the Human Dimensions of Organizations. He writes regularly for Fast Company, Inc and Harvard Business Review, and is co-host of the radio show and podcast “Two Guys on Your Head,” produced by KUT in Austin.